This is likely not about what you think…
It has been just over a month since returning from the JP Morgan Healthcare conference and my shoes are still wet. San Francisco is an amazing city, but less so in torrential rain when you must scramble from hotel to hotel, eagerly looking for your next 30-minute meeting with someone you may never see again. Trying to return emails or look up the location of your next get-together while holding an umbrella, racing between traffic, is challenging at best. Swipe right…or was it left.
Yet we all go – and actually look forward to going, in large measure to gauge the pulse of the industry and to assess what are some of the most critical themes for the upcoming year. This year, in particular, JP Morgan was a “can’t miss” event given the recent extraordinary healthcare M&A activity and the high-water mark pace of healthcare technology investments for 2017. Per Startup Health, there was $11.5 billion invested globally in the sector, while Rock Health calculated $5.8 billion invested domestically. The thousands of us wandering around San Francisco were eagerly searching for the “signal through all the noise” and were not disappointed. Quite clearly the healthcare sector is at a point of inflection as it navigates a set of major forces, many of which merge into one another.
Industry Consolidation and Vertical Integration: Interesting combinations and alliances are forming across the industry, all in an effort to capture more of the healthcare spend and improve overall margins (CVS/Aetna, Humana/Kindred, Albertsons/Rite Aid, Optum/DaVita, etc). Horizontal consolidation offers the promise of significant cost reduction, as redundancies are taken out and larger entities can improve purchasing leverage. Vertical combinations will allow companies to direct downstream patient/member/consumer healthcare spend and offer more compelling integrated care models. Non-healthcare players appear now to be ready to enter the industry in profoundly disruptive ways, further driving consolidation (see Amazon).
“Retailization” of Healthcare Continues Apace: Providers and payors continue to pursue strategies to engage and activate the member/patient and treat them more like rational healthcare consumers. In large measure in response to dramatic cost pressures, the system at large is requiring the consumer to engage in ways not previously seen. High-deductible plans, greater choice among providers, as well as a deeper appreciation that an informed consumer likely will lead to better outcomes, healthcare entities will continue to force this wave of consumerism driving compelling investment opportunities.
Innovative Value-Based Care Models: After some initial enthusiasm with the introduction of alternative payment models three years ago (see MACRA – Medicare Access and CHIP Reauthorization Act of 2015), which somewhat underwhelmed, providers taking on greater outcomes risk for greater potential payments and greater margins. The transition away from “fee-for-service” frameworks will be in fits and starts given implications to rearchitecting workflows and IT systems, but it seems inevitable and will accelerate as outcomes data from value-based care models become known.
Role of Government: The political commotion, while distracting and at most times frustrating to witness, masks some of the real transformation in policy coming out of Washington. And while the fog of confusion is oftentimes dense, the current administration is chipping away at the pillars of the Affordable Care Act (no individual mandate, allow insurers to sell “skimpy” plans, etc). Medicaid is in the crosshairs of regulators as states begin to impose work requirements, while increasingly entrepreneurs and investors are exploring novel ways to address the needs of that population. Changes to reimbursement models will also have a significant impact in 2018. For instance, Centers for Medicare and Medicaid Services (CMS) has introduced a new reimbursable Improvement Activity provision to its Merit-based Incentive Payment System (MIPS) which will improve prospects for telehealth and remote patient monitoring. Additionally, recently appointed new FDA Commissioner Dr. Scott Gottlieb has articulated a compelling innovation agenda, most notably with the “pre-certification program” whereby companies and developers (versus products) are approved and encouraged to accelerate development programs.
While this list is in no way comprehensive and ignores important issues such as the opioid crisis or exciting advances in personalized medicines, many of our recent discussions hit on these broad themes, and with reasonably consistent interpretation of their impact on the healthcare technology sector. Innovators will build the solutions which will drive a more integrated system as the healthcare market navigates this inflection point. Specifically, a number of investment opportunities are emerging in this environment, and fortunately, continue to map closely to our areas of thematic interest. Excuse the buzzwords.
- Advances in Artificial Intelligence and Machine Learning quite simply will make the healthcare system “smarter” and more responsive to provider and patient needs. Whether analyzing genetic data sets or reams of image data, delivery of care will improve as these technologies proliferate. Arguably, though, the healthcare sector is moving from an early development phase where entrepreneurs developed a number of more narrow, undifferentiated algorithms to more fulsome products with AI and ML capabilities built into a larger solution offering (see Aetion, HealthReveal)
- While blockchain platforms have drafted behind the investor euphoria with cryptocurrencies, undeniably these new platforms will become platforms for many secure healthcare environments which have massive data integration needs. Expect real substantial companies to be built here (see Curisium)
- Ever improving care coordination tools will be built to assist patient/member/consumers through their healthcare journey. A more integrated care delivery system demands better tools to assist in activation, engagement and navigation (see Welltok)
- Personalized medicine and digital therapeutics continue to capture investor interest. A number of venture-backed companies are emerging which hold great promise for “software-as-a-therapy.”
- Services represent much of the $3.2 trillion healthcare spend in the United States annually. Exciting novel care models, either for specific sub-patient populations or more broadly applicable, will be an important focus area for investors this year. Outcomes and cost of care data for providers who are at-risk are compelling. In many cases, these results are quite disruptive and can be readily integrated into larger provider networks (see Iora, Bright Health).
Again, this list is neither comprehensive nor exhaustive. There are several other topical areas of interest, many of which will contribute meaningfully to the success of our fund. The great frontier in healthcare is the home, with providers and technology companies striving to develop healthcare solutions and services in the home that people will embrace. A trusted branded full-service comprehensive offering will be developed that will deliver high quality care remotely and in the home.
Another emerging area of interest is clearly around social determinants and how might they be more effectively assessed, accessed and managed. Will radical new models emerge that will be patient-centric and dramatically improve health equity? A greater appreciation of what makes one well includes a host of basic services, many of them would not be considered traditional healthcare services, and yet the healthcare system may be called on to provide access to such services. A more holistic understanding of one’s condition is required to be able to more effectively provide care.
And while much of JP Morgan is a blur, there were a few other lasting impressions. As a jet-lagged East Coast participant, I was often on the street at 4:30am PST heading to that one Starbucks that is open at that hour and was staggered by the number of homeless people. There is a cruel juxtaposition as an investor contemplating innovative models in the social determinants space to see those with abject needs surrounded by leaders of the healthcare industry.
I was also struck that I actually never met anyone who worked at JP Morgan that entire week. And I was particularly disappointed to learn that there were more CEOs presenting with the name “Michael” than there were women presenting.